DBRS Confirms Ratings of Goldman Sachs – Senior at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed all ratings for The Goldman Sachs Group, Inc. (Goldman or the Company) and related entities, including its Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle). The trend on all ratings remains Stable. These rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

In confirming the ratings with a Stable trend, DBRS is taking into account the resiliency of Goldman’s global franchise, its leading position in diversified capital markets businesses, combined with solid and improving earnings generation despite a still challenging operating environment. The ratings reflect Goldman’s strength in risk management, well-developed operational capabilities, persistent culture and consistent senior management. The current ratings level also considers the continued headwinds facing the Company, including a still challenging operating environment and regulatory uncertainty, as well as Goldman’s exposure to wide ranging capital markets activities and a notable level of market risk, which support the franchise value but elevates risk levels. With a balance sheet that is largely mark-to-market, the Company is exposed to potential large market movements and market disruptions.

DBRS sees upward pressure on the Company’s ratings as constrained by various factors including the still evolving regulatory environment and its potential impact on Goldman’s franchise, as well as the Company’s business model which generally runs with a higher level of risk than higher-rated institutions. While DBRS views Goldman as well-positioned to reap the benefits of a more substantial global economic recovery, it will remain challenged to manage a more complex, expanding organization in an evolving environment that is highlighted by regulatory change. Over the longer-term, upward ratings movement could potentially be driven by the growth of more stable, consistent revenues sources, such as Goldman’s Investment Management division, which also could enhance stability of funding through deposit growth.

Negative rating action could arise if investor confidence is adversely impacted in a Goldman-specific scenario, which could particularly affect the Company given its sizable reliance on wholesale funding. Any indications of significant weakening in Goldman’s franchise, significant risk management deficiencies or its ability to generate sustainable earnings could also pressure ratings.

Goldman’s franchise is supported by its top-tier positioning within the capital markets, with trading businesses within Institutional Client Services (ICS) that are extensively diversified across products, markets and client segments. The Company maintains a top position in its Investment Banking (IB) franchise, with notable dominance in the Financial Advisory space which is a cornerstone of its business model. Continuing this leading position is important from a ratings perspective, as the well-entrenched IB franchise provides an entryway through which clients engage with other product and service offerings at Goldman. Goldman’s franchise benefits from its other business segments, which add further diversity. Momentum in Investment Management (IM) has been evident in recent years, which is important from a ratings perspective, as it contributes to the stability of overall earnings. The Investing & Lending (I&L) segment adds diversity and important competitive capabilities, but also risk and volatility to the Company’s earnings.

From an earnings perspective, Goldman reported another strong annual performance in 2014, with returns at the high-end of its global peer group. Net earnings (to common) of $8.1 billion on net revenues of $34.5 billion remains substantial, resulting in a return on average common equity of 11.2% for the year. This trend continued in 1Q15 with an annualized return on average common equity of 14.7% in what is generally a strong quarter for capital markets businesses. Important to success across Goldman’s businesses is cost-efficient execution with strength in technology and systems providing a significant benefit. In addition, DBRS perceives that Goldman is benefiting from the disrupted competitive landscape that has seen certain competitors exit key business lines, while other competitors have been distracted by significant restructurings or other internal issues.

Goldman’s risk management function is viewed internally as an important, core function to the overall strength of the franchise, and supports its ability to appropriately evaluate risk/reward. In competing in the current environment, Goldman also benefits from the stability of its organization, well-developed operational capabilities, ability to generate growth organically with limited acquisitions and divestitures, persistent culture and consistent senior management. Goldman’s willingness to take risk where it sees commensurate reward is factored into the current rating level.

Further underpinning the rating, Goldman has a sound financial profile. The Company continues to refine and strengthen its funding profile through the ongoing assessment of the characteristics of its diverse funding sources with those of the assets being funded. Goldman has focused its funding profile toward more stable, term funding sources, such as deposits, long-term debt, and equity. With assets of $865 billion at end-1Q15, the Company also maintains a significant level of liquidity, averaging $175 billion in the quarter. As a bank holding company (BHC), Goldman has access to the Fed’s discount window, as well as other programs. This access gives the market an extra degree of confidence in Goldman’s ability to weather another severe liquidity crisis. Additionally, Goldman’s capitalization continues to improve, due partly to more demanding regulatory requirements. The Company reported a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach of 11.8%, and a Supplementary Leverage Ratio of 5.3% at 1Q15.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: October 12, 2000
Most Recent Rating: August 25, 2014

For additional information on this rating, please refer to the linking document under Related Research.